Tata Steel expects the aggressive bidding frenzy for iron ore mines to cool off as companies realise the economics don’t add up, managing director and chief executive officer TV Narendran told Moneycontrol in an interview on November 13. The comments come at a time when iron ore auction premiums have soared past 100%, driven by too many bidders chasing too few blocks, as only a limited number of iron ore mines have been put up for auction.
Integrated steel manufacturers, merchant miners and public sector entities have been aggresively bidding for the key raw material amid ongoing expansion activities. For steel companies, as output grows, it becomes crucial to own more captive supply to ensure stability and hedge against volatility in prices.
Higher iron ore auction premiums, which have been hovering between 115-200% and sometimes reaching 200%, are a concern for steelmakers. In September this year, Rungta Mines placed the highest bid for the Purheibahal iron ore block in the mines auctions in Odisha at a premium of 124 per cent.
In response, the Indian government is considering changes to the auction format, with proposals to cap the premium at 50 per cent, according to reports.
"This kind of crazy bidding for iron ore will slow down after some time when people realize that it really doesn't make sense. It happened in coal, also thermal coal in the early days. Everyone was bidding at values at which it made no economic sense," Narendran said.
"I think the problem is also that we are not having enough mines coming up for auction. If a lot more mines come up for auction, then some of this frenzy will recede. Iron ore rich states like Jharkhand, Chhattisgarh are yet to have auctions like Odisha, so I think there is an opportunity there as well," he added.
According to data published by the Ministry of Mines, ~130 iron ore (including combined iron ore, manganese and dolomite deposits) blocks have been auctioned since 2015 across different states mainly Odisha, Karnataka and Chhattisgarh (3 states producing ~87% of India's iron ore). The weighted average premiums across states often exceed 100%, but production from these mines has remained strong and supply to the system continues to grow, especially from the Odisha blocks and expired/category C blocks in Karnataka despite of high auction premiums.
Captive players with end-use plants have dominated the process, winning about 80 of the 130 blocks and controlling more than ~60% of Odisha, which produces 55% of India's iron ore, according to market analytics firm, BigMint.
Steelmaking hinges on iron ore, coke, and flux as its key raw materials, with ~60% of its costs incurred till the hot metal stage, 70% of which is from coking coal. Tata Steel meets 100% of its iron ore needs in India through its six captive mines (Noamundi, Katamati, Joda East, Khondbond, Vijaya II, and Koida) and has mining expansion plans at Gandhalpada and Kalamang. Additionally, Tata Steel owns iron ore assets in the Labrador and Northern Quebec regions of Canada.
Further, Tata Steel plans to double down on lucrative downstream products like galvanized sheets, colour-coated steel, tinplate, tubes etc to offset any impact from the rise in raw materials cost.
"We are also focusing a lot on our downstream and that will also help us mitigate the impact of higher iron ore cost. So whether it's the tubes business, the wires business or whether it is galvanized steel, coated steel or tin plate, that we are doubling. A lot of downstream investments are also happening so that our realizations keep going up and the percentage of raw material cost and the overall cost of revenue structure becomes less," Narendran said.
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